OREANDA-NEWS. Fitch Ratings has affirmed Banco Nacional de Mexico, S. A.'s (Banamex) Long-Term (LT) Local Currency (LC) and Foreign Currency (FC) Issuer Default Ratings (IDRs) at 'A'. Fitch has also downgraded Banamex's Viability Rating (VR) to 'a-' from 'a'. After the VR downgrade, Banamex's IDRs are now driven by the support of its parent.

Simultaneously, Fitch has affirmed the national scale ratings of Banamex and Acciones y Valores Banamex, S. A. de C. V., Casa de Bolsa (Accival) at 'AAA(mex)' and 'F1+(mex)'.

Fitch has revised the Rating Outlook on Banamex's LT LC IDR to Stable from Positive. The Rating Outlook is Stable for all long-term ratings. A full list of rating actions follows at the end of this press release.

Fitch downgraded Banamex's VR because the company's profile and financial performance, while robust, are no longer commensurate with a VR two notches above the sovereign rating. Banamex's performance and balance sheet integrity compare well with similarly rated banks around the world and show a special resilience against changes in the economic cycle in the form of a very robust loss absorption capacity. However, its somewhat lagging performance, among other factors, prevents the bank from being rated two notches above the sovereign rating. Banamex's revised VR remains above the sovereign, and Fitch's assessment of the country's operating environment is usually one of the main factors behind the VR of banks in such rating level, which is also another factor that constrains the uplift for the bank's VR.

The revision of the LT LC IDR Outlook is driven by the recent downgrade of Mexico's LT LC IDR to 'BBB+' from 'A-' that limits any potential upgrade of Banamex's LT LC IDR given the current Fitch's criteria that usually limits potential uplift from a relatively strong foreign owner to two notches above the sovereign's rating. After this sovereign action, Banamex's IDRs are capped to the Single-A level. Fitch's previous Rating Outlook for Banamex's LT LC IDR reflected the likelihood of internal total loss absorbing capacity (TLAC) as required by the Financial Stability Board (FSB).

KEY RATING DRIVERS

IDRs and Support Rating

Banamex's local and foreign currency IDRs, as well as its Support Rating (SR) of '1' are now driven by the strong ability and propensity of its ultimate parent; Citigroup Inc. (Citi, 'A'/Stable Outlook by Fitch; VR 'a') to provide support to Banamex, if it were required.

Banamex's IDRs and SR reflect the extremely high probability of external support from Citi. Fitch considers that Banamex is a core subsidiary for Citi, being one of its most relevant subsidiaries in emerging markets, and support should be forthcoming in case of need. Historically, Mexican operations have contributed 10%-12% to Citigroup's overall profits. Therefore, Banamex's IDRs are aligned with Citi's.

VR

Banamex's VR reflects the bank's ability to sustain its ample loss absorption capacity, strong and resilient earnings, robust franchise, and sound liquidity and funding profile. Fitch views favorably Banamex's successful execution of its strategy to recover rapidly from adverse operational and credit events from previous years. However, the VR also factors in the lower core earnings than its closest peers and above-average credit costs.

Banamex's capital position is a key strength and is enhanced by its sound and recurrent generation of earnings, and moderate dividend payments. As such, Banamex's capital position is not only ample but also make up solely from tier 1 core equity. The loss absorption capacity is further enhanced by an ample base of loan loss reserves. Banamex's Fitch Core Capital (FCC) to Risk Weighted Assets (RWA) ratios are above their closest peers both local and international. As of June 2016, the FCC ratio reached levels of 15.4% and averaged 15% in the last five years.

Banamex's consistent profitability continues to be underpinned mostly by its strong and stable margins, as well as a recurring and well-diversified revenue base. While profitability ratios are often lower than those of its closest local competitors, this is explained by the prudential policy of the bank in terms of loan loss provisions and charge-offs. Fitch expects that operating profits to RWA should stay close to 2% in the foreseeable future, levels below to some of its main competitors. However, Banamex's pre-impairment operating profitability remains one of the highest among major Mexican bank. The bank's ample securities portfolio, which provides a major strength in terms of liquidity, also constrains overall profitability to some extent.

Banamex has an ample, low-cost domestic and broadly diversified retail deposit base. It is perceived as one of the country's strongest banks, as evidenced by the stability of its existing funds and new deposits in times of stress. Customer deposits are Banamex's primary funding source, accounting for 93% of traditional banking liabilities at the end of 1H16 and for over 110% of gross loans. The loans-to-deposits ratio stood at a reasonable 88% at the same date, increasing steadily in line with loan growth; however the strongest among the large Mexican banks. Regulatory liquidity coverage ratio (LCR; under Basel III rules) is well above the legal requirement of 70% for 2016. As of June 2016, Banamex's LCR stood at a satisfactory 210%.

Banamex's delinquency levels are sound and compare favourably with those of its closest national and international peers. When the operating environment worsens and delinquency increases, Banamex has been characterized by the use of ample provisions and charge-offs to contain possible negative impacts. Since December 2014, Banamex's delinquency levels are improving as a result of better credit process and an underwriting strategy oriented towards its existing client base that has been implemented for the past five years. As of June 2016, Banamex's NPL (non-performing loans that considers loans 90 days overdue) to gross loans ratio stood at 1.6% and 6.1% under the most stringent measure (NPL plus last 12-month charge-offs). Banamex's provisions have remained at a relatively high range of 4.5% to 5% of average loans, largely driven by the bank's more conservative stance toward reserves for credit cards and other unsecured loans. Obligor concentrations are moderate; the 20 largest borrowers accounted for 0.8x the bank Tier I's equity.

NATIONAL RATINGS AND SENIOR DEBT

Banamex national-scale ratings are driven by its strong intrinsic profile, reflected in its relatively higher VR. Fitch rates at the same rating level the local debt issued by Banamex as the debt is senior unsecured.

In turn, the national-scale ratings of Accival, one of the largest brokerage firms in Mexico, have been affirmed because it is perceived by Fitch as a core entity of Banamex. Fitch believes that Accival is a core and highly integrated affiliate of the bank and its local parent company, Grupo Financiero Banamex (GFBanamex). In addition, GFBanamex is legally enforced to provide support to its subsidiaries. Therefore, the national scale ratings of the brokerage unit are aligned with the bank's ratings.

RATING SENSITIVITIES

IDRs and SR

There is limited upside potential on Banamex's IDRs, since these are already two-notches above the sovereign's IDRs. The LT LC IDR could only be upgraded by an increase in the sovereign rating. The LT FC IDR could improve also if the sovereign rating is upgraded and if there is an increase in Mexico's country ceiling. Any change on Fitch's perception towards the strategic importance of Banamex to its parent may trigger a review of its Support rating and IDRs. If Citi's ratings are downgraded by more than one notch, Banamex? s IDRs could also be downgraded.

The downside potential for Banamex's IDRs and its national-scale ratings is currently low, since Fitch considers that Banamex is a core subsidiary of Citi. Even if Banamex's VR were eventually downgraded further, its IDRs will likely remain aligned with Citi's IDRs. However, its IDRs would likely mirror any potential negative action on Citi's rating, and will likely continue to be the highest among its own VR, or Citi's IDRs.

Banamex's SR could be affected if Fitch changes its view of Citi's ability or willingness to support the Mexican bank.

VR

In Fitch's opinion, there is no upside potential of Banamex's VR considering the current sovereign rating, since this rating is already one notch above Mexico's sovereign rating.

In turn, Banamex's VR may be negatively affected under a scenario of sustained weaker performance, expressed with and/or a FCC ratio below 12% and impairment loans plus charge-offs to gross loans sustained above 6%. Also, if the bank shows operating profits to risk weighted assets consistently below 2%, its VR could be negatively affected.

NATIONAL RATINGS AND SENIOR DEBT

Banamex and Accival's national scale ratings could only be negatively affected by a multi-notch downgrade of the bank's VR, or a multi-notch downgrade of Citi's IDRs, or a change in their propensity to support these affiliates. Banamex's senior unsecured debt would mirror any potential downgrade on the bank's national scale ratings.

Fitch has affirmed the ratings as follows:

Banamex:

--Long-Term Foreign Currency IDR at 'A'; Outlook Stable;

--Short-Term Foreign Currency IDR at 'F1';

--Long-Term Local Currency IDR at 'A'; Outlook Stable;

--Short-Term Local Currency IDR at 'F1';

--Support Rating at '1';

--Long-term National-scale rating at 'AAA(mex)'; Outlook Stable

--Short-term National-scale rating at 'F1+(mex)';

--Long-term National-scale rating for local senior debt issuances at 'AAA(mex)'.

Accival:

--Long-term National-scale rating at 'AAA(mex)'; Outlook Stable;

--Short-term National-scale rating at 'F1+(mex)'.

Fitch has downgraded the following rating:

Banamex:

--Viability rating to 'a-' from 'a'.